People Express startup woes typical, experts say

NEWPORT NEWS — The recent startup woes for People Express Airlines Inc. are not unusual for a new low-cost carrier, according to a local economist.

But how the company is able to fare in the increasingly hostile market for airline upstarts is being closely watched by industry executives, analysts and experts, as consolidation among major airlines is changing the landscape of the commercial flight business.

Last week, the airline said it laid off six non-essential employees as it continues to try to raise capital to begin its service. This is the second time in more than a year the fledgling company has had to lay off or furlough employees. In August of 2012, the company also let go several workers, before rehiring all staff when it acquired additional funding.

"It's very challenging to start a new business," said Gary Wagner, an economist at Old Dominion University.

"Although it may seem as though airlines are extremely profitable because most companies have a large volume of passenger traffic, airlines have operated on very tight after-tax profit margins that have been in the 2-3 percent range over the past decade," Wagner said.

"This does not mean that a new airline cannot succeed, but the odds are stacked against any startup in such a competitive environment. The fact that we have also seen several big mergers in the industry over the past few years is indicative of the firms struggling to remain profitable."

Michael Morisi, president of People Express, said laying off staff was a difficult decision, but one that was best for the "long term interests" of the company at this time. "We hope to welcome back all of our employees shortly as additional funds are raised," Morisi said in a statement emailed to the Daily Press.

"Launching a commercial airline is one of the most complex operations in the country," Morisi continued. "Aside from being one of the most regulated industries in the U.S., the capital requirements that exist prior to certification make it very difficult because all of the risk lies on the initial investors, as does of course the potential for significant (return on investment)."

Morisi said based on a schedule created with Headwaters MB based in Denver, an investment banking firm People Express has partnered with, he hopes the airline can launch service in the second quarter of 2014.

The airline has changed its expected start of service at least twice including eyeing launch dates in the summer of 2012 and spring of 2013.

"The issue really is you either start very well capitalized or you don't last long," said Robert Mann, an airline consultant based in Port Washington, New York.

Mann is a former executive at American Airlines, Pan-Am, and TWA, and has been monitoring People Express's attempt to launch airline service. Mann said the layoffs at People Express show the volatile nature of starting up a new airline.

"Either things are going far more slowly than they have expected and they don't need people around, or the funding is not there to continue to pursue it at the expected rate," Mann said. "You burn money by the day or week, depending on these cases."

He added, "This isn't atypical of new startups, although there hasn't been a lot of new entry into the market recently." Mann said many investment firms are reluctant to invest in airline startups because they have investments in other, larger airlines that would be hurt by competition.

"I don't know if anyone knows the right formula to starting up an airline," said Jessica Wharton, a spokeswoman for Newport News-Williamsburg International Airport.

"They need community support to continue to work on their endeavor. It will in turn help everybody. Who doesn't need more competition, some more flights and some more low airfares," Wharton said. "I think everybody in this region can agree it would be good for everybody."